Commodity Prices Could Rise Sharply if Israel-Hamas Conflict Escalates, World Bank Says

“History suggests that an escalation of the conflict in the region could trigger substantial oil supply disruptions,” the World Bank said. “A major escalation could cause an initial surge in oil prices, with disruptive knock on effects on other commodity markets.”

Energy prices make up the majority of the World Bank’s commodity price index, so any price shocks would lead the whole index higher, it said. The commodity price index rose 5% during the third quarter, largely pushed by supply-side issues in oil markets, it said.

So far, the effect on markets have been muted, with oil prices pulling back after an initial shock, though they remain higher. Brent crude was trading at $88.11 a barrel early on Monday compared with $84.59 a barrel on Oct. 6, the day before Hamas’s attack on Israel.

The bank highlighted previous Middle Eastern energy shocks, such as the Arab oil embargo in 1973, the Iranian revolution in 1978 and Iraqi invasion of Kuwait in 1990 as instances when oil prices jumped on conflicts in the region. However, supply is much more geographically diverse now and in general the world is less reliant on oil compared to those periods, which could mitigate against some of the effects of conflict escalation, it said.

If oil prices do rise on the conflict, most other commodities including food and metals would also push higher, the report said. For example, higher demand for natural gas would push up the price of fertilizers, ultimately leading to higher food prices.

The Washington D.C.-based lender said it forecasts oil prices to average $90 a barrel this quarter, but also provided three price scenarios based on different levels of disruption to the market.

Under a small-disruption scenario, in which global oil supply is cut by 0.5 million barrels a day to 2 million barrels a day, oil prices would initially increase by 3% to 13% or $3 to $12 a barrel above the baseline $90-a-barrel estimate.

Under medium disruption, oil supply could be cut by 3 million barrels a day to 5 million barrels a day. “This reduction would be comparable with the loss of 3% of global oil supply during the Iraq war in 2003,” the bank said, adding that prices would initially increase by about 21% to 35%, or $19 to $31 a barrel, above the baseline.

If the war turns into a regional conflict, supply could fall by between 6 million to 8 million barrels a day–equivalent to the Arab oil embargo, leading to a 56% to 75% increase in prices, or an increase of between $50 and $67 above the baseline barrel price.

Gold prices could also rise on the conflict, as risk appetite from investors wanes and havens instead are sought, the bank said. “The potential impact of these developments can be seen in movements in the price of gold, which has increased over 8% since the onset of the conflict. Previous conflicts and other episodes of geopolitical uncertainty have also been accompanied by gold prices.” Futures on Monday crossed $2,000 an ounce in intraday trading, having last closed above that mark for the first time since July.

Write to Yusuf Khan at [email protected]